Perhaps the most newsworthy event of this past week was the World Economic Forum in Davos, Switzerland. The event brings together leaders from around the world to discuss pertinent economics topics. The attendees heard presentations on how good of a measurement GDP is, machine learning, data privacy, artificial intelligence, global labor markets, Chinese economic growth, conditions in Europe, trade, and a host of other popular topics.
The founding member, Klaus Schwab, even addressed attendees, mentioning a topic he’s mentioned multiple times. His theory is that we’re entering a fourth industrial revolution. Without addressing the philosophical aspects of the high-level issues presented to World Economic Forum attendees, one question observers probably should ask is: Does Davos actually matter? Does what happens at Davos influence markets, such as the price of gold?
The answer to the latter question is in Figure 1. The figure depicts the total gain or decline in the price of gold over the time of the World Economic Forum. Interestingly, and perhaps surprisingly, on average, gold gains 1.1%.
How does gold typically perform on non-Davos days?
A comparison of the price of gold movements during Davis days compared with non-Davos days is given in Figure 2. Surprisingly, gold performs generally much better during Davos days than non-Davis days. The difference is not statistically insignificant, either.
On a daily basis, gold’s average return is 0.03%. During Davos days, the average return is 0.33%. That means gold performs 11 times better during Davos days. Amazing. What’s causing this?
Possible Explanations on the “Davos Days Effect”
What could causing the “Davos Days Effect”?
One possible explanation is that the World Economic Forum gives markets a feeling that problems are being solved, or at least being addressed. News surrounding the World Economic Forum is generally positive, which may have a calming effect on investors. This calming feeling then shows up in demand for financial assets, including the world’s most well-known precious metal – gold.
An alternative view is that the World Economic Forum makes investors jittery, and when market participants become concerned about what policymakers are up to, they shift their holdings to safe assets. Gold is such an asset. Topics that might cause investors worry might include discussions of geopolitical tensions or trade, to name a few.
Overall, what could be behind the “Davos Effect” on the price of gold? There’s no real, certain answer, only speculation. What analysts do know is that gold generally performs better during Davos days compared to non-Davos days. Think about this the next time you’re moving assets around at the end of January 2020.